FAQ: Act 32, Earned Income Tax Collection Reform

Yes. Businesses with multiple locations across the state may remit to the county tax collection district where they are headquartered. In exchange, the employers who exercise this option will be required to remit withholdings and employee wage tax detail electronically on a monthly basis, thus accelerating the transfer of tax revenues.

Through greater use of technology, collections, distributions and cash flow will be enhanced.

Employers will be required to withhold applicable earned income tax from non-residents and residents. They will also be required to remit all withholdings to the tax collection district where they are located within 30 days of the end of each quarter, unless they have locations in multiple TCDs and exercise the option discussed in FAQ #1. Tax Officers are required to remit all withholdings to the taxing jurisdictions no later than 60 days after receipt for all taxes received prior to April 1, 2013. Taxes received from employers on or after April 1, 2013 must be remitted to the taxing jurisdictions no later than 30 days after receipt. Tax Officers will also be required to provide real time tax data and revenue (rather than estimates) to taxing jurisdictions. The tax collection committee may require more frequent distributions.

Under Act 32, employers are required to withhold the higher of the employee’s resident earned income tax amount (rate of total resident EIT where they reside) vs. the employee’s municipal non-resident earned income tax amount (rate of non-resident EIT where they are employed) and remit to the workplace tax collector.

Example #1: If an individual resides in a municipality/school district that impose a total resident EIT rate of 0.5% and they work in a municipality that imposes a municipal non-resident EIT rate of 1.0%…a total EIT of 1.0% would be withheld from the employee.

Example #2: If an individual resides in a municipality/school district that impose a total resident EIT rate of 1.6% and they work in a municipality that imposes a municipal non-resident rate of 1.3%…a total EIT of 1.6% would be withheld from the employee.

There are a number of provisions in the Act that strengthen accountability and enforcement.

• Tax Officers must keep records of every dollar received and distributed and submit monthly reports accounting for each dollar.
• The required annual audit includes a reconciliation of monthly reports and the receipt and disbursement of all tax monies, as well as, findings of noncompliance if applicable.
• Bonding for the Tax Officer is required in compliance with the Regulations established by the Department.
• Fines and penalties are provided in cases where the Tax Officer fails to comply with the Act.
• Tax collection committees are required to appoint an appeals board to hear appeals of Tax Officer determinations.
• Tax Officers will continue to use existing enforcement provisions and be provided with new tools to pursue claims against those that fail to comply.
• The Department of Revenue is required to enter into an agreement with each tax collection district for the exchange of tax information on a yearly basis.
• If the Tax Officer fails to comply with Acts 511 and 32, increased fines and penalties are provided for, including possible jail time.

The Tax Collection Committee must provide for an annual audit of the Tax Officer by the end of each calendar year. The audit is to include all the books, accounts, financial statements, compliance reports and records. The audit shall be conducted by a certified public accountant or public accountant approved by the TCC. The CPA or public accountant must issue their report in a standardized format developed by DCED. This report must include an auditor’s opinion letter, financial statement, reconciliation of the monthly reports with the receipts and disbursements, summary of collection fees charged, report of the Tax Officer’s compliance with the act, a management letter if one is issued by the auditor, and a list of any findings of noncompliance with the act. If there are any noncompliance findings, a copy of the report will be sent to DCED and the Pennsylvania Auditor General. A copy of the report must be filed with every political subdivision within the tax collection district that imposes and earned income tax and DCED on or before September 1st of the following year.

The tax collection committee is required to appoint the Tax Officer based either on the weighted vote formula described above or on a procedure agreed to by the TCC and incorporated into their by-laws. Under Act 32, a Tax Officer may be the collector through an intergovernmental arrangement, an existing tax collection bureau or a third party collector. The TCC must initially appoint the Tax Officer no later than September 15, 2010. The TCC is required to enter into a formal agreement with the Tax Officer unless the TCC creates its own tax bureau.

A Tax Collection Committee cannot appoint a Tax Officer who:

• Has been convicted of a felony involving fraud, extortion or dishonesty.
• Has engaged in conduct that adversely reflects on the Tax Officer’s credibility, honesty or integrity.
• Is unable to attain bonding requirements.
• Has not met the mandatory education requirements established by DCED.
• Has not met additional requirements established by both the tax collection committee and DCED.

The statute divides Allegheny County into four separate tax collection districts. One district will be comprised of the City of Pittsburgh and Mt Oliver Borough while the three remaining districts will be separated geographically by the three rivers.

The Local Tax Enabling Act authorizes local governments to tax earned income and net profits. Earned income is compensation as defined under the PA Personal Income Tax Law, which includes salaries or other payments based on payroll or piecework, for services rendered as a part-time or full-time employee of an individual, partnership, business or nonprofit corporation, or government agency. Net profits are the net income from the operation of a business or profession as a sole-proprietor or partner of a business.

Under the Act, net losses from operation of one business may be used by a taxpayer to offset net profits from another business, but cannot be used to offset earned income. For example, if a taxpayer has a $40,000 net loss from a business selling garden supplies and $20,000 of earned income from his job at the local grocery store, the business loss may not be used to offset his earnings and so taxes will be due on the full $20,000 of earned income.

If a taxpayer has a net loss of $30,000 from a business selling garden supplies and a net profit of $50,000 from a business selling used cars, and earned income of $60,000 from his job as an accountant, the taxpayer’s local income tax liability will be based on $20,000 of net profits and $60,000 of earned income because the taxpayer can offset one business loss against the second business profit.

If a taxpayer has a net loss of $50,000 from his garden supply business, a profit of $30,000 from his used car business and income of $60,000 from his job as an accountant, the taxpayer’s local income tax liability will be based on $60,000 of earned income. The loss from the first business may be used to offset the gain from the second but the net loss from the combined businesses cannot be used to offset earned income.

PSD (political subdivision) codes are six-digit numbers that identify a taxpayer’s residence location and work site locations. Employees are required to complete a Residency Certification Form upon hire or to provide notification of a name or address change. PSD codes are a necessary component of information required to be provided on this form. PSD codes will play an integral role in assisting employers and Tax Officers remit and distribute the correct amount of earned income tax to the appropriate taxing jurisdictions.

Assistance in locating and identifying the appropriate PSD codes can be found on the DCED website.

Act 32 more closely follows the Department of Revenue’s definition of compensation by including active duty military compensation received for service in Pennsylvania; therefore, active military duty compensation is now taxable.